GROWTH IN A DOWNTURN

A Conservative Bank Gets A Makeover

HDFC Bank did not go overboard during the boom. Now it is using its strong balance sheet to grow aggressively

RAGHU MOHAN04 July 2009

Photographs pic by Satheesh Nair

Mandeep Maitra still vividly recalls that day in Chandigarh in 2008, standing before a hall full of anxious Sikhs employees. As she spoke, she says, she got the strange feeling that they were not even listening. This was a month after HDFC Bank got the nod to gobble up Centurion Bank of Punjab (CBoP), and among the first casualties was the logo of CBoP, which also took the Punjab identity out of the 400 branches of CBoP.

It was a huge culture shock, given CBoPs Sikh affiliation that was evident in its name. The erstwhile Bank of Punjab that had been promoted by Sardar Inderjit Singh, the entity predating CBoP, even had a branch at the Golden Temple. As HDFC Banks human resources (HR) chief, Maitra had the unenviable task of reassuring CBoPs employees, who were clearly rattled by the speed at which HDFC Bank Managing Director Aditya Puri was pushing through with the merger.

Fortuitously, Maitra had two aces up her sleeve: her own identity, which helped break the ice. I spoke to them in Punjabi, telling them that I am a Sardarni too. She also empathised with how they felt; she had come from Timesbank, HDFC Banks first acquisition in 2001. It helped that she was a trained psychologist.

A year and more down the line, Puri has not taken his foot off the accelerator to sustain the momentum of change. The first stage is to get CBoPs branches to our level of efficiency, and we will complete that in the next 24 months or so, he says. We are pushing hard to grow. We will be aggressive relative to the market. (See interview on page 30).

HUNGER TO EXPAND: (Left) HDFCBanks Managing Director Aditya Puriand (above) Executive Director Paresh Sukthankar

But Puri does not have a reputation of being a votary of playing for size or market share. He has always been conservative, a great relationship man, says Sanjay Nayar, India head of buyout firm Kohlberg, Kravis & Roberts, who headed Citis operations in India for close to a decade. I have known him from my early days at Citi. HDFC Bank is a great franchise and offers great basic banking. Adds Romesh Sobti, managing director and CEO of IndusInd Bank: There is not a single product with recall with HDFC Bank. What Puri has proved is that even in a commoditised market, you can be a winner if you can play it right.

Girding the Loins

And now that the former Citi-banker (hows that for irony?) smells opportunity, banks in his peer group are marking time and trying to make sense of the new, post-crisis world. HDFC Bank has strong distributional reach 1,412 branches across 528 cities at March end 2009, up from 761 branches in 327 cities in the preceding year). It has the capital strength, with a capital adequacy of 15 per cent, 6 per cent above the regulatory floor.

And it will get stronger when Rs 4,000 crore of warrants issued to parent HDFC are exercised in November (the parent has to hold 22 per cent in the bank). More recently, HDFC Bank overtook ICICI Bank to become the second-largest bank by market capitalisation after the State Bank of India (SBI). It also has the people, managing to get nearly 900 ICICI Bank staffers every year over the past three years. In some places, almost the entire top brass of an ICICI Bank branch would walk in for interviews. Of course, the first thing I ask is how many of you are from ICICI Bank? I do not want that culture out here, quips Maitra. Of the people hired in the past three years, about 40 per cent came from other banks.

HDFC Banks deposit base is built on a very stable retail base: current, savings and retail term deposits make up about 80 per cent. That also means that its costs are low, and margins can be high. It also has a strong technology platform that supports its client servicing capabilities. All of this gives HDFC Bank the foundation for the shift from a hitherto conservative stance to one of qualified aggression.

The Leopard Changes Its Spots

Puri says that ferocious growth in banks is a matter of the past, given the air pockets some of them have hit. For instance, Standard Chartered Bank (StanChart) and HSBC have exited car loans; others want to get out of retail banking completely, such as Royal Bank of Scotland, which is looking for a buyer of its acquisition of ABN Amro Banks retail business.

For most state-run banks, it is not the most significant part of their business. Despite all this talk about state-run banks growing faster, how many have grown faster in retail than HDFC Bank? Puri asks. The retail banking story so far is a mixed one while just about everybody is out there, few have got the act right.

BEING CAUTIOUS: HDFC Banks Executive Director (corporate banking)Harish Engineer believes market conditions are tough

The ramp up of retail banking by competitor ICICI Bank fired the imagination in the early 2000s. In 2002-03, ICICIs retail assets were Rs 19,000 crore, up 211.48 per cent from Rs 6,100 crore in 2001-02. The very next year, its market share of auto and two-wheeler loans were at 34 per cent and 15 per cent while that of SBI was at 15 per cent in both these categories. By end-March 2007, retail assets stood at Rs 1,27,689 crore, up 39 per cent from the previous year, and accounting for 65 per cent of all assets.

Or take credit cards for example. In 2001, ICICI Bank issued 220,000 credit cards, and when HDFC Bank launched its offering two years later, it was no less competitive in attracting customers by offering them lower rates 1.5 per cent a month to transfer balances from other card issuers. The difference was that while it sought volumes, it was also being selective as to who it issued plastic to.

Today, HDFC Bank hawks the full retail suite credit cards, auto, personal and gold loans, and advances against shares. It hawks the home loans of parent HDFC. In 2008-09, it sold Rs 3,500 crore of such loans every month. And nearly 60 per cent of its total credit Rs 98,883 crore at end-March 2009, up by 55 per cent over the previous year is accounted for by retail. The number of savings accounts has increased by over 70 per cent and the total customer base has increased to about 19 million (of which 2 million were added through CBoP) from about 11.6 million in FY08. Credit card issuance moderated in FY09 outstanding credit cards grew 14 per cent versus a compounded annual growth rate of 64 per cent over FY04-FY08.

Parsing the NumbersBut the CBoP merger has come with costs too. HDFC Bank has charged Rs 690 crore to CBoP reserves due to harmonisation of accounting policies including non-performing asset (NPA) provisions besides other merger related expenses. The CBoP merger has led to a net worth accretion of about Rs 1,340 crore versus CBoPs net assets of approximately Rs 2,090 crore.The question of banking on retail business to grow is also open for debate when it comes to financial performance. Citi, with 40 branches, posted a net profit of Rs 2,100 crore for 2008-09. By comparison, HDFC Banks profit after tax for FY09 was Rs 2,245 crore, despite its larger footprint. IndusInds Sobti disagrees with such a comparison: It is bizarre to expect that a 50 or 100-branch bank model can be run on a 1,600-branch platform.

*Including exchange and brokerage; Income pie includes 0.05% share from other sources Source: Company

Growth through acquisition also has adverse effects on operational cost and efficiency structures. HDFC Banks cost to income ratio at 53.6 per cent was one of the highest amongst private banks in FY09. It was 45 per cent for Axis Bank and ICICI Bank. HDFC Banks employee base of 52,000-plus is 52 per cent higher than ICICI Banks (while total assets are 52 per cent lower) and 155 per cent higher than Axis Banks (while total assets are just 24 per cent higher).

Paresh Sukthankar, executive director of HDFC Bank, says that the CBoP merger only added 20 per cent to the balance sheet. Its the distribution that has made the big difference. Incrementally, it added 55 per cent, he says. That makes growth comparisons a little more complicated. Not only are HDFC Banks own numbers difficult to compare, but the profile of the comparator group is fragmented.

At one end is the SBI group, a few big state-run banks such as Punjab National Bank, Bank of Baroda and Canara Bank. Then you have ICICI Bank and IDBI Bank, that morphed into banks carrying legacy assets. The two big foreign banks, StanChart and Citi, can only grow organically, and not through acquisitions, and the last mentioned a key player in retail has gone off the boil of late.

Banking On The Customer BaseSo what is one to make of Puris stress on growth? Well, it is with reference to product lines in which he sees an opportunity. I am not going to run after market share. I have no burning desire to be No. 1, if such growth will raise some issues later. Puri refuses to name any bank, but it appeared to be a not-so-subtle dig at ICICI Bank.

MERGING ISSUES: Mandeep Maitra, HDFC Banks HR head, was instrumental in bringing HDFC Bank and CBoP employees together

One big factor in HDFC Banks favour is that it has all along been pretty good at garnering current and savings accounts (Casa). At March end 2009, this stood at 44 per cent of the banks deposit base better than SBIs 42 per cent and ICICI Banks 25 per cent. Some attribute this figure to liquidity improving in the last quarter, but the reason why HDFC Banks Casa ratio is better than SBI is that it is good at grabbing salary account business and float money by virtue of it being a capital markets player. Low-cost deposits are essential in building the retail book, as many banks have learnt.

In an earlier interview to BW, Chanda Kochhar, managing director and CEO of ICICI Bank, had said that while her bank has done very well in growing its Casa, it has also been taking on bulk deposits. As a result, our Casa ratio has never looked very good, she said.

Developing the Casa corpus also requires technology. While foreign banks have it, reach is restricted by regulation. It is not a mere issue of buying technology off the shelf. You got to work on it to make it work for you, says Anil Jaggia, HDFC Banks chief information officer. IndusInd Bank is a case in point it started off as a wholesale bank much like HDFC Bank, but its technology did not deliver when it forayed into retail.

In the CBoP merger, HDFC Bank managed a quick integration despite being on different platforms i-flexs Flexcube and Infosyss Finacle. HDFC Bank is now powered by Flexcube. Jaggia was instrumental in managing a similar situation in the Centurion Bank-BoP merger as well. And if a bank can get 28 per cent of its transactions to move online in seven years, it cuts down costs. Yet the success of the Casa story could change at HDFC Bank. Prakar Sharma, analyst at broking firm CLSA says the share of Casa deposits has peaked, and will remain under pressure. Others such as Deutsche Banks Dipankar Choudhury say lower float funds and slower branch expansion will hurt funding costs.

Slower, But SteadierThese are variables that Harish Engineer, HDFC Banks executive director for corporate banking, readily concedes. Yes, I agree that the masti (fun) is over, he says. Lower activity in the stockmarkets and technology like the Real Time Gross Settlement can reduce float funds and have an impact on margins.

Adds CLSAs Sharma: Given that loan growth will moderate from now on, and with Casa under pressure, margins will contract going ahead. The counter view is that loan growth rate will moderate not because the bank is going to slow down the jump of 55 per cent in the 2008-09 accounts for CBoP. And the effect of floats on Casa will affect other banks as well.

TECH POWER: HDFC Banks Chief Information Officer Anil Jaggia achieved quick IT integration after CBoP merger

The other headache is dud loans. During the fourth quarter, the banks stock of NPAs shot up by 119 per cent to Rs 1,988 crore. But, 42 per cent of this was from CBoPs books. On a standalone basis, the banks NPAs rose 27 per cent to Rs 1,153 crore. Provisioning also had to go up to Rs 657 crore. But the banks net non-performing loans are still just 0.6 per cent.

The total restructured assets are only 0.4 per cent of advances. Of this, 0.3 per cent is NPA and has been included in the March end figures, says Abhijit Majumder at broking firm Prabhudas Leeladhar. A significant deterioration in asset quality is unlikely. Sukthankar at HDFC Bank also brushes aside any chance of the unsecured book going awry; he feels that the assets are diversified, the banks credit appraisal is second to none and that these issues will be taken care of once CBoPs assets run off.

Bigger, Better, Bolder, But...HDFC Bank acquired four banks in essence: Timesbank, Centurion Bank, Bank of Punjab and Lord Krishna Bank. Bank mergers in India have largely been bailouts with a good bank carrying the can like in the case of Oriental Bank of Commerce and Global Trust Bank; reverse-mergers to shape a new business model such as ICICI Bank and IDBI Bank or a conversion like in tha case of Kotak Mahindra Bank. HDFC Banks mergers have been rational and unforced.

And this has meant that since the Timesbank merger in 2000, HDFC Bank has always been in a flux when it came to cadre-culture. HDFC Bank along with its two subsidiaries HDFC Securities and HDB Financial Services employs close to 80,000 people. That is less than SBI, but more than ICICI Bank. In the private sector, only large groups such as the Tatas, Birlas or Reliance employ more.

The much-merged bank had to contend with employee attitudes like he is from BoP, I was promised a hike when I came in from Centurion or my role was not this at CBoP. Maitra says that these issues have more or less been resolved, and only 15 per cent remain. There is a lesson here for others: as bank consolidation gathers steam, HR will be a key issue.

SBI will grapple with it when a few of its associate banks merge with it; ING Vysya Bank has still to come to terms with HR, after ING took a 44 per cent stake in Vysya Bank. Globally, even Citi had an issue after Travelers came into its fold; Bank of America and Merrill Lynch have to deal with it. For HDFC Bank, managing HR will remain an important challenge.

But having come so far, Puri is not resting his oars despite the occasional noontime siesta. Does he admire any bankers? He is not very forthcoming, but smiles mischievously: Well... it depends at what point in time. Nothing succeeds like success. If thats the yardstick, he sure admires the person in his mirror.

raghu dot mohan at abp dot in

(Businessworld Issue Dated 7-13 July 2009)ICICI sends legal notice to HDFC Bank official12 Jul 2009, 0841 hrs IST, ET Bureau MUMBAI: Indias second-largest lender, ICICI Bank, has shot off a legal notice to a senior official of HDFC Bank, for airing views on ICICI in a business magazine. Mandeep Maitra, the officer in question, who is the head of human resources at HDFC Bank, told the magazine that she was careful in hiring people from ICICI Bank simply because she did not want the ICICI culture to seep into the bank she works for. The contents of the story say that in each one of the past three years HDFC Bank had attracted around 900 officials from ICICI Bank. In some places, almost the entire top brass of an ICICI Bank branch would walk in for interviews. Ms Maitra is alleged to have said, Of course, the first thing I ask is How many of you are from ICICI Bank? I do not want that culture out here. ICICI Bank has taken offence to this comment. The notice seeks an apology from Ms Maitra and was sent to her in her individual capacity and not to the bank, something an ICICI Bank official clarified. ICICI Bank believes she was acting out of context and it was unbecoming and unprofessional of her to have made such a comment. Ms Maitra is said to be on a two-month sabbatical. An HDFC Bank official said, Its a quote out of context. We have already written to the publication. It is unfortunate that the story ended up hurting someone. It was never our intention and has never been. Given ICICI Banks aggressive style and its emergence as a price warrior in the retail loan market, a statement like this possibly lends itself to misinterpretation. The banks management under former CEO KV Kamath has been innovative, took new risks and often ventured into uncharted territories. Between 2000 and 2004, ICICI bank rewrote the rules of the game in the retail loan market. But while some of the decisions have paid off, a few backfired.